Room for Improvement in Vivo Participacoes

Brazilian mobile operator Vivo Participacoes’ (NYSE:VIV) posted first quarter results last Friday. After hearing the investors call and downloading the 1Q results report, the highlights for this last quarter are:

Net service revenue reached BRL 3.6 billion, up by 21.4 percent over the same quarter last year.

EBITDA jumped by 25.2 percent to BRL 1.2 billion, with the EBITDA margin reaching 29.9 percent in the quarter, up by 1.0 percentage points versus the same period last year.

The net profit for the quarter amounted to BRL 123.5 million, growing 26.5 percent compared with the same quarter in 2008.

The operator reached 45.6 million customers at the end of March, adding some 696,000 customers in the first quarter. The number GSM/UMTS users increased to more than 33.3 million and its mobile data and VAS revenue grew 29 percent year-on year to 12.1 percent of the net service revenue.

Vivo’s ARPU decreased by 8.5 percent to BRL 27 compared with the first quarter of 2008.

This apparent good news reveals the leadership of this operator in the Brazilian market, as its competitors are suffering a significantly worse quarter (as can be downloaded here and here). The market itself is showing a recession impact, with forecast estimations that will be difficult to achieve this year. Having said this, and after reading the results, it might seem that Vivo shows a good performance when compared to competitors, but we believe there’s been a bad performance when compared to forecasts.

In our opinion, there is a big issue that should be addressed as a core revamping strategy to return results to forecasts, that is the market share erosion (primarily in the prepaid segment) that’s taking place in the last quarters.

Vivo has been maintaining the market leader positioning, although it has been losing market share sustainably during the last semesters (between 2007 and 2008, Vivo has been losing approx. 0.48 pp per semester).

Claro has already surpassed TIM as number 2 in the market and is continuously reducing its gap with Vivo. After the merger with Brasil Telecom, Oi has reached a fair share of 20%, but continues growing, specially after the launch of services in the Sao Paulo state.

TIM, similarly to Vivo, is losing terrain progressively, and specially during the beginning of 2009. Nevertheless, this scenario is aligned with TIM strategic guidelines, with Q1 as a “cleaning base period”, and Q2 as the starting point of a new growth period based on a new offer and a new approach to market.

MNP will reduce the barriers for changing the operator, increasing the risk of a deeper change in the current status quo.

As read in the 1Q09 results, Vivo performs above market both in share of sales and churn rate. But this shouldn’t be enough. To stop and reverse the market share erosion trend, Vivo needs to outperform itself in “Gross adds” market share. I had the opportunity to meet Vivo’s executives and shareholders and we all agree on this. The results published are not bad, but don’t meet expectations. The recession might be affecting the market, but there are some levers that can be touched to improve current situation. There’s still room for improvement, but this is just our opinion.